China's Image As a Manufacturing Center Is Threatened By Melamine Scandal

Two of the six banned Nestle milk powder products, Klim and Nespray, after they were removed from the shelves in a supermarket in Taipei Credit: Nicky Loh
HONG KONG (AdAgeChina.com) -- China's melamine scandal is tainting multinational brands, and making China's own brands even less appealing, to both Chinese and international consumers.

The presence of melamine, an industrial chemical that makes food appear to have a higher protein content, in milk, tea, chocolate and candy products has produced corporate as well as human casualties, starting with China's Sanlu Group.

Because Sanlu's poisoned baby formula led to the death and illness of Chinese infants, the damage to its brand is "irreversible," said Jonathan Chajet, managing director of Interbrand in China.

But melamine has also turned up in a range of products made by other companies all over the world, including food giants Unilever, Heinz, Cadbury, Mars and Nestlé.

Health officials have pulled Chinese-made milk products from store shelves across Asia and beyond after faint traces of melamine were discovered outside China.

Stores in the U.S., the U.K., Australia, New Zealand and Singapore have stopped selling one of the most popular Chinese sweet brands, White Rabbit Creamy Candies, made with tainted milk powder.

Tainted products have turned up worldwide
Unilever, for instance, has recalled four batches of Lipton 3-in-1 milk tea powder in Hong Kong and Macau made with melamine-tainted milk powder. And Chinese-made Cadbury chocolate eclairs have been recalled in Australia.

Nestlé has pulled products like Neslac, a powdered milk product for young children, from stores in Taiwan in a spat with health officials.

Nestlé said in a statement: "To make the vital distinction between products made from milk adulterated with melamine and those containing traces of melamine occurring naturally in the general environment, standards setting limits for the presence of melamine in food are essential.

Nestlé therefore welcomes the fact that Taiwan is currently considering such legislation, but fails to understand why the authorities are asking Nestlé to temporarily delist these products which, by their own admission, are absolutely safe by any recognized international standards."

Nestlé said it will reintroduce the products "as soon as regulatory standards for melamine in food are set in Taiwan."

In South Korea, Nestle was asked to withdraw a batch of mini Kit Kat bars made in China, and Mars had to recall some Snickers and M&M's products.

The recalls facing multinationals are smaller than the fiasco facing Sanlu, and have not resulted in any known deaths or illnesses, but the crisis demonstrates that the cost of using China as a part of the global supply chain has just gone up.

"The quality of milk products in China must rise," said David Wolf, a marketing consultant based in Beijing. "Companies are going to wind up footing the bill one way or the other. [This crisis] will almost certainly force a number of companies to re-evaluate China as a source of dairy product exports."

After discovering a batch of baby food contaminated with melamine, Heinz has said it will stop using milk sourced from China in its food processing operations in China and Hong Kong.
The scandal has "put Brand China a few big steps backwards," said Viveca Chan, Hong Kong-based chairman-CEO of WE Marketing Group, an independent agency that helps Chinese companies build new brands.

As much as it has hurt the image of local brands, however, the negative effect on well-known foreign brands "is even bigger," she warned.

Sanlu's traditional consumers, for example, are mostly found in rural, smaller Chinese cities. Consumers there have fewer brand choices and limited disposable income. In general, their expectations and standards are lower.

Multinationals need to recover brand trust
Consumers in China's largest and most prosperous cities, however, can and do buy foreign brands. They "have more disposable income, brand choices and higher expectations of quality," Ms. Chan said.

"This damage on brand trust will extend across other non-tainted categories in food and beverage for international brands. [Multinationals] will have to do even more to recover brand preference and brand trust."

In China, the two top dairy brands Yili and Mengniu, among China's largest TV advertisers, both yanked all their advertising after the Sanlu scandal broke.

The crisis is an even bigger setback for efforts to create international Chinese brands.

Chinese brands have "never boasted" the credibility and cool necessary to compete in developed markets," said Tom Doctoroff, JWT's area director, Northeast Asia and CEO, China in Shanghai. He suspects "the sheer unseemliness" of poisoned milk will push the day Chinese brands are able to compete at a price premium further into the future.

The latest food scandal is especially crippling for China's psyche coming so soon after the Olympic Games.

During the games, there was "strong improvement" in westerners' willingness to consider products made in China, Mr. Chajet said. "Once the milk scandal hit, the fears returned to pre-Olympics levels. [The crisis] reinforces the perception that buying Chinese products can be dangerous."